Have a question as to gain on a home after a spouse passes away.

lenny1evanm.4

Is there a stepped up basis on personal home gains when a spouse passes away? Not a wealthy family, but have 7 acres someone is willing to overpay for. Trying to figure out what tax liability will be if it sold for 1.2 million. Hoping there's a stepped up basis upon the death where it increases the starting amount considerable closer to that, so that they can still take the couple $500k gain and largely reduce the tax.

KeriC

The answer to your question depends on whether or not you live in a community property state.

Community Property State
According to Pub 551 (page 10), "When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. For this rule to apply, at least half the value of the community property interest must be includible in the decedent's gross estate, whether or not the estate must file a return."

Not a community property state
Your 50% joint ownership of the home will not change basis, but the 50% from your deceased spouse will have a step-up in basis. The step-up in basis means that your basis in the 50% from your deceased spouse will be the fair market value of the home on the date of death.

As a simplified example, if your home was originally purchased for $200,000 your basis would be $100,000 and your spouse's basis would be $100,000. If the land was valued at $1 million when your spouse passed away, your basis in the 50% from your spouse would be $500,000. When selling, your total basis would be $600,000 ($100,000 + 500,000).

In both community property and non-community property states
For the home sale exclusion amount, Pub 525 specifies on Page 4, "…you may be able to increase your exclusion amount from $250,000 to $500,000. You may take the higher exclusion if you meet all of the following conditions.

1. You sell your home within 2 years of the death of your spouse;
2. You haven’t remarried at the time of the sale;
3. Neither you nor your late spouse took the exclusion on another home sold less than 2 years before the date of the current home sale; and
4. You meet the 2-year ownership and residence requirements (including your late spouse's times of ownership and residence, if applicable).

If you don't meet the 4 criteria above, you will be limited to the $250,000 home sale exclusion.